The world’s attention as been on Greece, as Europe hopes its collapsing economy and its rejection of austerity measures will not pull down the rest of the Eurozone. But what happened to Greece is also happening to the American territory of Puerto Rico, whose imminent default on its $72 billion debt–most of which is owed to U.S. investors (which don’t have that much exposure in Greece)–will have a far greater effect on the American economy.
The White House is refusing to bail out Puerto Rico but is instead asking Congress to pass a law allowing the territory to declare bankruptcy. But that means the American investors will take the loss, which won’t be good for the U.S. economy.
As U.S. investors have been panicking over a potential Greek collapse, Puerto Rico’s governor Sunday announced that the small U.S. territory cannot pay its roughly $72 billion in debt.
Less than 24 hours later, Gov. Alejandro Garcia Padilla proposed a plan to seek a restructuring of the island’s debt, suggesting that the island is virtually insolvent.
A long-awaited report compiled by former International Monetary Fund staffers brought the Puerto Rican debt crisis back into the spotlight.The report concluded that the U.S. commonwealth has lost the ability to fund itself through public debt markets, while pointing to what the authors described as “a decade of stagnation, outmigration and debt.”
Although the Puerto Rican debt crisis is no secret to residents of the island, the governor’s statement essentially was the first official opening for a renegotiation of the debt, said economist Carlos Soto-Santoni, president of Nexos Económicos, a Puerto Rico-based consulting firm, and deputy adviser for former Governor Rafael Hernández Colón’s administration.
But the problem is that, as per the U.S. constitution, Puerto Rico cannot file for Chapter 9 bankruptcy, like Detroit did, and neither can its public corporations and local agencies, Soto-Santoni added.
So the governor is basically seeking a negotiated agreement with bondholders for a postponement of payments on the debt for a number of years.
The question that remains unaddressed, however, is what would revive growth on the island, as gross domestic product per capita is dwindling while debt per capita has been rising.
“In that sense, Puerto Rico is just like Greece,” Soto-Santoni said.
But U.S. investors would actually have much more to lose in a potential Puerto Rican default than in a Greek default. The reason is that Puerto Rico’s bonds are trading in the U.S. municipal bond market, while the vast majority of Greek debt is in the hands of the International Monetary Fund, the European Central Bank and eurozone countries.